(a) conduct in relation to any transaction or event that is regulated by the Code; and

(b) misleading or deceptive or likely to mislead or deceive.

(2) A person must not engage in conduct that is –

(a) incidental or preliminary to a transaction or event that is or is likely to be regulated by the Code; and

(b) misleading or deceptive or likely to mislead or deceive.”

Directors’ statements during a takeover

Any person who engages in misleading or deceptive conduct relating to a Code-regulated transaction or event is caught by the prohibition in rule 64 of the Code. Therefore, directors of companies involved in a Code-regulated transaction such as a takeover must also be careful not to engage in misleading or deceptive conduct.

During the course of the Panel’s ongoing consultation with parties involved in takeovers, the Panel has learned that some directors are concerned about whether they can rely on their ‘business judgement’ to justify what they say to shareholders or the market in light of rule 64. The Panel also understands that some directors are acting on external advice not to make any statement that cannot be justified by an expert or third-party report in case the Panel finds such statements “misleading or deceptive” under rule 64 of the Code.

The Panel wishes to dispel the myth that it would always require an expert or third-party report to justify or verify any statement made by directors of a company during a takeover.

During a takeover, shareholders should be able to look to the directors of the target company for guidance. The Panel is of the view that director guidance can be invaluable to shareholders in a takeover.

The Panel, in its determination of the matter involving Marlborough Lines Limited and Horizon Energy Distribution Limited, dated 10 May 2010, set out the test which it follows, when looking at whether an opinion is misleading or deceptive. For a full summary of the facts of this matter please refer to CodeWord 29.

The Panel considered in that case that:

(a) The evidence supported the view that the Directors of Horizon, at the time they authorised the release of the announcement that was alleged to have breached rule 64, honestly held the opinion that was expressed in the announcement;

(b) The evidence showed that the Directors of Horizon had a reasonable basis for holding the opinion that was expressed (the Directors of Horizon relied on detailed management forecasts that had been prepared); and

(c) The Directors’ opinion was not demonstrably wrong.

Accordingly, the Panel determined that it was satisfied that Horizon and the directors of Horizon acted in compliance with rule 64 of the Code when issuing the announcement in question. In a related determination, the Directors were, however, found to have breached rule 64 in terms of an omission to include certain material information in the announcement.

Conclusion

A statement made by Directors, based on their business judgement, will not be misleading or deceptive in terms of rule 64 of the Code if the opinion is honestly held, reasonably based and not demonstrably wrong. This analysis will apply to the specific circumstances of each situation.

The Panel does endorse Directors seeking specialist advice because it puts them in a better position to give advice to shareholders on the merits of a transaction,[2] and such advice could go some way in proving that a statement was reasonably based. However, it is not always the case that such advice is required in order to ensure that a statement would not be misleading or deceptive under rule 64 of the Code.

The Panel believes that, in many cases, a director may rely on management advice together with a director’s industry expertise and business judgement to know when a statement the directors want to make to shareholders is reasonably held.

Conversely, expert or third party advice is not necessarily a guarantee that an opinion is reasonable. Directors will always need to exercise their judgement to make this assessment.

Further information on rule 64 of the Code can be found in the Panel's Guidance Note and CodeWord 22. The Panel’s executive staff are available to discuss any queries you may have about the application of this rule.

During a takeover, shareholders should be able to look to the directors of the target company for guidance. The Panel is of the view that directors’ guidance can be invaluable to shareholders in a takeover.

Footnotes:

[1] If you would like further detailed information about this rule generally please refer to CodeWord 22.